40-plus? It's not too late to start saving

Published: Tuesday, 11 Feb 2014 | 8:00 AM ET

By: Shelly K. Schwartz, Special to CNBC.com

You're 40 and you wear it well. Career-wise you're right on track. You no longer seek others' approval. And you finally figured out how to get your kids to soccer practice and guitar lessons at 6 p.m. on Wednesday night—in two different towns.

Now, about that nest egg.

From a retirement-planning perspective, this is the decade where the rubber meets the road.
Those who started socking money away sooner are best positioned to meet their long-term goals, of course, but there's still plenty of time to shore up your savings if you've been hitting the snooze button on your 401(k) plan for the last 20 years.
"For a lot of people, their 40th birthday is when they start thinking about their financial future in earnest," said Gregory Olsen, a certified financial planner and partner with Lenox Advisors, noting 40-somethings often have the insight and maturity to project with greater accuracy their future income needs.

That figure, which differs for everyone, will depend on when you plan to retire, your projected life expectancy and whether you envision a low-budget retirement or one that includes trips to Europe and drinks at the club.

The Social Security Administration's life expectancy calculator offers general guidance on how long you may live, but you'll need to adjust the result to reflect your own health and family health risks.

When estimating your monthly expenses in retirement, factor in food, housing, transportation (car loan, gas and maintenance) and health care. (Remember, your home may be paid off by then and you'll no longer have to shell out for work-related expenses, but your health-care costs and travel budget will likely be higher.)

Next, determine how much, based on current projections, you'll be getting from guaranteed sources of income, including Social Security, trust funds (for the lucky few) and any pensions you may receive. Here again, you can estimate your future benefits on the Social Security Administration's website.


The difference between what you'll likely spend and how much you'll have in guaranteed income is the amount you need to save to maintain your standard of living, using tax-deferred retirement plans and taxable brokerage accounts.

Save up, stay healthy

Most financial planners recommend long-term savers sock 15 percent of their income away annually, maxing out tax-deferred 401(k)s and traditional IRAs first and then funneling extra savings into a Roth IRA.

A Roth IRA is funded with after-tax dollars, so you can't deduct your contributions. However, the earnings grow tax-free, and you won't need to begin a required minimum distribution at age 70½—or ever—allowing those dollars to continue generating compounded returns. That is one of the benefits of a Roth IRA vs. a standard IRA.

Married couples with a modified adjusted gross income of less than $181,000 can contribute the full $5,500 in 2014. Contribution limits kick in for those earning more.

However, if braces and car repairs make it hard to save as much as you should, don't panic, says Bob Adams, a certified financial planner with Armstrong Retirement Planning.
Simply direct new sources of income to your savings going forward and make a conscious decision to moderate your discretionary expenses starting today.
 

"If you should receive employment bonuses, stock option proceeds, inheritances or other unexpected money, think very seriously about applying it first toward your larger savings goals." -Bob Adams, certified financial planner, Armstrong Retirement Planning

"If you should receive employment bonuses, stock option proceeds, inheritances or other unexpected money, think very seriously about applying it first toward your larger savings goals and not a new car, new bathroom or European vacation," Adams said. "These one-time windfalls can significantly jump-start your savings program."

You can improve your financial prospects greatly, as well, by keeping yourself healthy, said Olsen at Lenox Advisors.

"If you can't save more today, you can at least minimize future expenses by taking better care of yourself," he said. "Lose weight, quit smoking and exercise often, because one of the biggest expenses in retirement is health-care costs."


Indeed, Fidelity Investments, which tracks retiree health-care costs, estimates that a 65-year-old couple retiring this year would need $240,000 to cover future medical costs—not including the cost of long-term care or any additional costs they might incur by opting for an early retirement before Medicare kicks in.
Expenses are higher still for those with chronic conditions like heart disease, diabetes and obesity.

Invest in yourself

During your 40s, don't forget to invest in yourself, said Matt Saneholtz, a certified financial planner and chartered financial analyst with Tobias Financial Advisors.

"Your highest income-earning years are usually still ahead of you into your 50s, so keep investing in your human capital," he said. "Keep learning, utilize your employer's training programs, take classes and stay on the cutting edge, because who knows what's going to happen with the job market."
One of the biggest pitfalls to retirement planning, he noted, is losing your job and being unemployed for a year or more—which not only impacts the amount you're able to save but may force your family to drain your retirement savings.

The other pitfall is being underinsured, Saneholtz said. If death or disaster strike, be sure your family—and your hard-earned nest egg—is protected with adequate health, life, auto and homeowner's coverage.

Other tips to ensure you don't outlive your savings down the road include maintaining an aggressive but diversified portfolio that consists of anywhere from 75 percent to 100 percent stocks, with any remaining percentage allocated to cash and bonds.
With a time horizon of 20 to 30 years before you retire, said Lenox Advisors' Olsen, you'll need that level of risk to grow your principal and offset the corrosive effects of inflation.
"Don't stress over how much you haven't saved," he said. "Get the facts in front of you, take your head out of the sand, and do the best you can with the time you have."

—By Shelly K. Schwartz, Special to CNBC.com

After 50, growing a nest egg gets easier

Published: Thursday, 20 Feb 2014 | 8:00 AM ET

 

By: Shelly K. Schwartz, Special to CNBC.com

Sharon Epperson and members of CNBC's Financial Advisors Council on how to turbo charge your savings in the years before retirement.

So you're 50. It's a lot better than you feared. It's better still if you're ready to get serious about your retirement savings.

Indeed, pre-retirees are often positioned to fund their nest eggs as never before.

Why? One or more of your kids may be out of the house, which frees up disposable income; your take-home pay may be at its peak; and you're now eligible to supersize your savings with higher tax-deferred contribution limits.
"There's a lot you can do in your 50s to build up that war chest," said Christopher Olsen, a certified financial planner with Ameriprise Platinum Financial Services.


The IRS allows those over age 50 to make additional catch-up contributions of $5,500 to their 401(k), 403(b), SARSEP or governmental 457(b), above and beyond the $17,500 annual limit for all taxpayers. Married couples who filed jointly and are both over age 50 may put a combined $11,000 extra into their accounts.

Those with a traditional IRA may contribute an extra $1,000 ($2,000 for married filers) beyond the standard $5,500 annual limit ($11,000 for married filers), but you may not be able to deduct all of your contribution if you also participate in a retirement plan at work.
Additionally, those with a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) or SIMPLE 401(k) plan may contribute an extra $2,500 per year. Married filers over age 50 may contribute an extra $5,000.

Courtney Keating | E+ | Getty Images

 

Higher tax bracket, bigger benefit

"If you're married and you and your spouse both make catch-up contributions to your 401(k)s or IRAs, you can save a good chunk of money," Olsen said.
For example, assuming you start catch-up contributions to your 401(k) at age 50, with an 8 percent annual rate of return, you would have amassed a savings of $667,661 by age 65. By comparison, if you make only the standard $17,500 contribution per year starting at age 50, you would have $508,003—about $160,000 less.

Another upside to being 50 and at the top of your earnings game is that your contributions to a tax-deferred account will likely benefit you more now than they did when you were 20, says certified financial planner Ken Waltzer, founder and president of Kenfield Capital Strategies.


"Many of my clients in their 50s are in the highest tax rate, which makes retirement saving even more attractive," he said, noting independent contractors and small-business owners can significantly reduce their taxable income.

Self-employed individuals and small-business owners over age 50, for example, who defer the maximum $57,500 per year to their Solo 401(k) ($17,500 in employee contributions, $5,500 for catch-up contributions, and $34,500 in employer contributions) can save $20,125 in federal taxes, he said.

Sidestepping landmines

When you reach your 50s, of course, there are plenty of financial landmines that could put a dent in your savings as well.

You may, for example, find yourself part of the "sandwich generation," providing often costly care to aging parents while still supporting your children.
A recent MetLife study found the proportion of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years, with a quarter of adult children, mainly baby boomers, providing care to a parent.


For those age 50 and older who leave the labor force early to care for an aging parent, the cost of providing that care averages $303,880 when you factor in lost wages, lost Social Security benefits and the negative impact on pensions, according to the study.
That's some serious coin.

Thus, it's important to talk openly with your parents about their financial position and plans for the future, said Matthew Saneholtz, a certified financial planner with Tobias Financial Advisors.

"You don't want to put too much weight in any inheritance you expect to receive. Anything can happen." -Matthew Saneholtz, certified financial planner, Tobias Financial Advisors

"Be sure your parents have an estate plan in place and long-term care coverage, or at least a picture of their final stages of life, because it might affect you," he said. "If you know your parents don't have the money to pay for care on their own, are you willing to use your own savings to help them? Will they rely on Medicaid? Will you take care of them in your own home? These are questions you need to think about, as they could become your dependents."
On the other end of the spectrum, a frank financial discussion with your parents is equally important if you expect to receive an inheritance, Saneholtz said.


They may share details about the estate they plan to leave behind, including gifts to charity, which will impact you. Just be sure you continue to save for yourself.
"You don't want to put too much weight in any inheritance you expect to receive," Saneholtz said. "Anything can happen. There are so many different variables, and documents can be changed at the last minute."

Is Gen X ready to retire? Depends who you ask

 Published: Sunday, 16 Feb 2014 | 9:00 AM ET

By: Kelley Holland | Special to CNBC

Get your happy on. Generation X may be more prepared for retirement than you've been hearing.

Then again, maybe not.

Late in 2013, Wells Fargo released its annual Middle Class Retirement Study. Included in the findings was the news that "middle-class Americans in their 30s seem to have the most realistic overall outlook for retirement."

The study found that these younger middle-class members of Gen X are socking away a larger share of their income for retirement than are people in their 20s or 40s. Thirty-somethings are more likely to have a retirement plan and are less wary of the gyrations of the stock market.
"They've done the best job planning, and they still have the luxury of time," said Joe Ready, head of the 401(k) division at Wells Fargo Institutional Retirement. "They have 25 to 35 years before they retire. Their savings rate is not where it needs to be, but it's still pretty good, and they still have more confidence in the market."

The picture is quite different for the 40-something cohort of Gen X, however. Ready pointed out that workers in their 40s and 50s started saving for retirement as defined benefit plans were phased out and 401(k) accounts were relatively new. They lost out on pensions but weren't told to view 401(k) savings as essential.

"I think we've got a whole group of people—call them the middle retirement generation—that is caught, and I would say it's through no fault of their own," he said. "Our national policy changed around how they were going to pay for retirement." These people may also be paying for aging parents and contending with college tuitions, he added.

A more recent study, from the Insured Retirement Institute, looked at Generation X as a single group and found their retirement readiness sorely lacking.
According to that study, Gen X's median retirement savings has dropped in the last two years and now stands at less than $60,000. It also found that 42 percent have less than $50,000 saved, compared with 30 percent two years ago.

"This five-year recession has taken a toll on the Gen Xers overall," said Cathy Weatherford, the institute's president and CEO. Many bought homes at the top of the market and are struggling with hefty mortgages and significant student loans, she added.

"You have to encourage the younger generation to save now, while they can," Tom Bradley, president of TD Ameritrade, tells CNBC's Mandy Drury. Steve Liesman weighs in.

On top of the recession, there is Gen Xers' behavior.
"There's been tremendous leakage in their retirement savings," Weatherford said. "Fourteen percent of Gen Xers have prematurely withdrawn money from their retirement accounts for nonretirement purposes in the last year." They did the same thing two years ago, she said, when the institute did its last survey.

Data from Fidelity Investments' 2013 Retirement Savings Assessment reveals similar contradictions.
Some 84 percent of Gen X respondents report having workplace retirement savings accounts, with their average reported savings rate 7 percent of income. But 20 percent are saving less than 2 percent of their income, and 30 percent of Gen Xers who responded have 20 percent or less of their reported retirement savings in equities.


What gives?

Part of the issue is what is being measured. It's true that many Gen Xers seem to be saving at a respectable rate, and some have a good handle on the value of investing in stocks. But it's also true that the total amount they have put away is inadequate, and a significant portion seems to be underinvested in equities.

Another issue is timing, and how that factors in. Older members of Gen X have 15 to 25 years until retirement, so they have some time to improve their situation. Younger Gen Xers have even longer. So though their savings may be weak now, a decent chance remains that they can correct matters. Millennials have even more time to get things right. Again, both can be true.
"I think our challenge from a middle-class standpoint is this middle group caught in the change," said Ready at Wells Fargo. "But the younger group, whether we call them Gen X or millennials, still have the power of time, and I think they get it. They're going to own their own quality of life in retirement."

—By CNBC's Kelley Holland. Follow her on Twitter @KKelleyHolland.

Buffett has big lead in bet against hedge funds

 

 Published: Thursday, 6 Feb 2014 | 12:00 AM ET

 

By: Alex Crippen | Senior Coordinating Producer

Why didn't Buffett pick his own stocks?

 

Thursday, 6 Feb 2014 | 12:00 PM ET

CNBC.com's Alex Crippen talks about the basic argument behind Warren Buffett's selection of an index fund in his big bet against hedge funds.

 

With four years remaining, Warren Buffett has a commanding lead in a decade-long bet that put a low-fee stock index fund up against a portfolio of high-priced hedge funds.

Buffett put his money behind his long-held argument that "experts" don't do better than the stock market as a whole. It's the basis of his argument that the fees "helpers" charge investors usually aren't justified.
In a Fortune piece, long-time Buffett friend Carol Loomis writes that after six years the fund Buffett selected for the wager, the Vanguard 500 Index Fund Admiral Shares, was up 43.8 percent at the end of 2013.

Getty Images

 

The other side of the bet is a collection of five hedge funds of funds chosen by New York-based Protégé Partners.

After all fees, their average gain was about 12.5 percent. The names of the funds have not been revealed.
After trailing for the first four years, Buffett's choice pulled ahead at the bet's halfway mark, with a gain of 8.69 percent vs. 0.13 percent for the hedge funds as of the end of 2012.

Now that Buffett has increased that lead, Protégé's Ted Seides said in the Fortune piece, "We've got our work cut out for us."
The prize, Berkshire Hathaway stock worth almost $1.3 million as of the end of 2013, will go to the winner's chosen charity. Buffett designated Girls Inc. of Omaha ("Inspiring all girls to be strong, smart, and bold") while Protégé chose U.K.-based Absolute Returns for Kids ("An international organization whose purpose is to transform children's lives.")
Originally the pot consisted of zero-coupon bonds that would be worth $1 million when the contest ended. Due to low interest rates, however, the value of the bonds came close to the target by the end of 2012. The two sides agreed to sell the bonds and buy Berkshire stock with the proceeds.
That turned out to be a good decision, as shares of Buffett's company soared more than 32 percent last year.
—By CNBC's Alex Crippen. Follow him on Twitter:

@alexcrippen